Astronauts have been often heard saying that seeing our little blue planet from space was a life changing moment for them. I can only imagine that this incredible visual perception has the power to transmit a sudden deep down realisation: we are all only alive for a snapshot of a moment, brothers and sisters in humanity, sharing one fragile blue ball of a lifeboat which floats in an infinite void… And I can only imagine that the conclusion that might follow can powerfully set the mesmerised witness on a newly shaped path in their lives…
Now, unfortunately I haven’t been to space myself. Nearest I got was a planetarium as an eight year old. But perhaps the next best thing for me were the two sabbaticals that I took; one in 2004 when I went backpacking in India & Nepal at the mature age of 28. And another in 2017, when I went backpacking in Latin America at the oh so old and wise age of 41.
And how incredibly life changing those two years were…!! So much so they changed me profoundly: My attitudes, (towards myself, nature, other human beings that inhabit our planet…), my opinions about, well just about everything, my world views, my values, goals (…), the way I lead my life today, the path I wish to see myself on moving forward… In fact, my entire life philosophy would’ve never been shaped to what it is, if it wasn’t for these two fateful, eye opening and incredibly joyful and adventurous sabbaticals…!!
And so, as you can probably tell, I just can’t recommend sabbaticals enough – no matter your age or circumstances, do plan and commit yourself to taking a sabbatical – I believe everyone should at least experience this magic once in their lives… Get the numbers to work (and I mean this literally as you will shortly find out!). And then take that time off my friend. Throw some clothes in a backpack and hit the road. You’ll be better for it – in fact, what are you waiting for? Life’s a journey way too short, too unique, too fragile, too uncertain – and unless you believe spending it in an office or on Zoom, working for the man until you hit 67, to only then take that life changing career break is a good deal (…?) you better start planning for that sabbatical right now.
To help you get going, I’m going to share with you how I planned mine. For what it’s worth.
The first time I went on a sabbatical was in 2004. I was not yet very sophisticated about my financial planning. I simply figured that I if I worked my a** off, invested a tiny bit onto my pension, stashed aside as much money as I could, it would all work out. And indeed 1.5 years later my GF and I boarded a flight to Mumbai with an open ticket and no further plans. One of the many things that I realised that year, was that living modestly and saving a chunk of your monthly income, allows you to free up many months and even years, from having to work for the man. This was a revelation, albeit being broke upon return made it short lived, but by the time I was getting ready to take a stab at a second sabbatical, I was already far more strategic about the whole thing. I was a little older. And I was a little more experienced. At 40, I also had way more money saved and invested than I had at 28. Being more ambitious, I wanted not only to work hard and save for a year long “walkabout” – but this time I also wanted to have it all fully paid for by way of investing!
But how could I possibly do that?
I started, as any decent project should, by pulling the finger out and researching my options. Turns out it’s not that hard if you are willing to live modestly, save aggressively and invest wisely.
Here’s what I found out in a nutshell:
- I needed a budget to work against. Since I calculated that one year of backpacking in Latin America in 2017 would cost my partner and I ~£25K in cash, that became the budget. I will now need to save £25K (though having been a saver for a while at this point, this was not a big task).
- Next, I will need to “net zero” (i.e. neutralise) the above £25K budget and then have another £25K earned on top so I can get paid whilst sunbathing on the above dune by the lake. Here I will need to get a little more creative. And so I figured this is how the cookie would crumble: I would a) max out my yearly UK pension allowance of £40K – retroactively filling the gaps for the past 3 years which is the maximum allowed limit in the UK – and which will have HMRC returning my already paid income tax over those 3 years for the total of at least £24K. Why so? Because for every £32K that I stash into my pension for each of those 3 years, HMRC would top-up my allowances to £40K i.e. with £8K of income tax returned to me for each of those 3 years and b) I’ll invest all of these funds in the stock exchange, wrapped in my pension such, that the annual expected return over the period of time between the transaction in 2016 (the year I was planning the journey) and accessing my pension at age 57 (in my case 2033) would yield at the very least ~26K inflation adjusted.
And thus, if you’re still with me, by following the above little plan, I would both “net zero” most of my £25K budget needed during the sabbatical AND earn an additional ~£26K in the period of time between making the transaction (2016) and returning from the sabbatical (2018). The catch being: I will not be able to access these funds before 2033. (At the time I was not familiar with pensions and tax returns the way I am now and so I thought this plan was as ambitious as it gets. Later on I realised this is exactly how I would also come to plan FIRE…)
Let’s recap quickly:
1) To get going with my sabbatical, I would need a) £25K set aside in cash for the trip abroad and b) £96K invested (this would be channeled from my other savings and investments) in the stock exchange in a pension wrapper (that’s £32K * 3 to max out retroactively the 3 years of my pension allowance). In real terms, this however would amount to £25K in cash and £120K invested in my pension (as now HMRC would have topped up my pension allowances by £8K each i.e. from £32K to £40K for each of the 3 years). By making this move, I would have now “net zeroed” (i.e. destroyed!) the £25K budget for the sabbatical by capitalising on every available penny returned to me by HMRC. But I would still need to earn another ~£26K to have made the sabbatical a profitable adventure – How?
2) Here’s how. Investing in a pension, as per above, can be done via an existing pension provided to you by your employer OR by opening a SIPP (self invested personal pension). And opening a SIPP, as I found out, takes no more than just a few clicks on the Vanguard website(though there are many other options, a world of SIPPs out there as vast as the universe!). Also, contributing to your pension provided to you by your employer is almost just as easy. I chose to invest in a mix of employer provided pensions and a Vanguard SIPP, all with asset allocations of ca 80/20 (equity/bonds). For my Vanguard SIPP, my choice at the time was the good old S&P 500 tracking ETF. And so I will use it here for the purpose of illustration and to explain how I planned to earn an additional ~£26K.
This good old mean machine of an ETF comes with a 0.07% ongoing charge and tracks an index that has delivered annual returns of ~10% since 1926 – so assuming the S&P 500 will keep delivering similar returns also over the next couple of decades , you can see why I shouldn’t be terribly unreasonable if I expected my investment to yield ~£26.5K in compound interest over the first 2 years (and a hell of a lot more over a much longer period of time which I was actually aiming at!). Run the math for yourself if you don’t believe me! The downside? Those expected earnings, theoretical – though probable – as they may be, would only be realised by the time I can access my SIPP and which for me would have been in 17 years from the moment of transacting. But as I’m a very patient man, who understands well the magical power of compound interest and annualised returns, and who is willing to take his chances with the markets, that would do just fine.
Now let’s bring this thin to conclusion, shall we?
I have now shown, not only how I “net zeroed” my £25K budget for the sabbatical, but also how I went about earning another ~£26K on top. In fact, and as I mentioned the magical words “compound interest” earlier, assuming the S&P 500 keeps delivering, then by the time I have accessed my nest egg of £120K in 17 years (as I’m writing these words it’s actually 12 years from now – my oh my how time flies!) it would have already earned a compound interest of ~£532K in a tax advantaged account!! (Yes I know. Obviously a lot can go either wrong, or incredibly right over a period of 17 years… But 1) I’m a ‘buy and hold’ kind of guy who aims to keep those funds invested for at least… Well, forever and 2) I trust you get my point…)
To finalise – This little plan worked like magic for my partner and I. And so I just had to share it with you as well. We worked hard you see. We lived relatively modestly and saved as much as we could to make this happen. We planned thoroughly to get as much tax back as we possibly could. We took our chances and invested our hard earned cash in the stock exchange. None of this came to us fast or easy. But let me tell you, it all sure paid off. BIG TIME. Not just financially. But those years out there… Traveling slowly… Backpacking our incredible planet’s sublime mountain ranges, vast deserts and incredible jungles, sailing its majestic rivers, meeting so many wonderful people along the way, facing our fears, falling in love ever deeper with each other, learning to appreciate our unique lives on this incredible blue ball, and so much more… – those years really did change us profoundly… I couldn’t possibly convey how much in words. But you bet we’re planning a third sabbatical already!